A Legal Guide to Tech Start-Ups
2014 was a profitable year for start-ups. Thanks to easy-to-use apps, a “glam squad,” a personal driver, and even your own personal butler are just a few clicks away. Tech start-ups, like Shyp, eliminate the need for running to the post office, and the Humin app takes the effort out of having to remember things about someone you’ve just met. That’s right, there’s an app that remembers all the details about the first time you meet someone (so you no longer have to). Which is a relief, because meeting people and having to remember their name and interests can really be exhausting, right? With tech start-ups now becoming part of our everyday lives, and with (sometimes) unsophisticated entrepreneurs behind these ideas, it’s easy to lose sight of the complex legal implications involved. Here are just a few of the most common legal implications for start-ups:
Protecting your IP (and coming up with a name)
When starting a company, it may be easy to forget that this is of utmost priority. First, you don’t want to be lackadaisical when choosing a name. It’s important to check with the U.S. Patent and Trademark Office for similar names. If the name you choose has already been trademarked, the company may be looking at a trademark infringement suit before the company even becomes profitable. In addition, some trademarks are protected under common law even if they aren’t registered.
Once you finesse your way through the trademark maze, it’s important to properly protect your IP. First, it’s important to register the business name, which simply puts state government on notice that you are doing business under a name other you’re your name[i] (ie. John Smith). Applying for trademark protection can be done online, and registering your trademark or service mark ensures that your customers will recognize your brand or services and be able to distinguish your business from copycats or inferior companies.
De facto partnerships
What’s so amazing about some of the most recent tech start-ups is that they are formed by normal people, and not by well-seasoned businessmen or businesswomen. In fact, many of these start-ups are formed by young adults in their 20’s and 30’s. With generous slices of the American dream being served to young entrepreneurs, I can only help but wonder how many of them don’t realize what money can do to friendships. With the success of tech start-ups, friends discussing a great idea in a garage can soon lead to significant wealth, but even protecting yourself from a childhood friend when forming a start-up is essential. Forming a de facto partnership is often a consequence of poor business planning. This could mean that the actions of one partner may be held against the entire partnership. Even without a written agreement a de facto partnership means: each partner is deemed to act on behalf of the partnership in the ordinary course of business; and each partner is personally liable for the obligations of the partnership.[ii] This could be bad news for someone who goes into business with their impulsive childhood friend. Clearly defining business boundaries with a written agreement is an important step in starting any new business.
Treating the Company as a Separate Entity (starting as a corporation or LLC)
Starting the business as a Corporation or LLC offers significant protection from business creditors,[iii] which means that business owners will not be held personally responsible for business debts and liabilities. LLC’s also offer flexible management structure, allowing the business to be run by the owners or managers instead of forming a board of directors (required for incorporation).
Like LLC’s, corporations are seen as a separate entity; protecting its owners from personally liability. However, corporations can issue shares of stock – making raising capital and business expansion much easier. Additionally, banks are often more willing to lend money to corporations, and corporations are often seen as more credible than other business types.[iv]
Liabilities Relating to Services
One of the tech start-ups that immediately come to mind under this issue is Über. The ride-sharing app faces significant legal issues – from taxi lobbying putting pressure on local governments to shut Über down[v], to claims of drivers sexually harassing customers. Those resisting Über explain that they operate in a gray area. Because the company doesn’t own cars, but software, they are technically a tech company. For this reason, many argue that Über is evading regulations that are typically placed on public transportation services.[vi] It’s important for start-ups to consider compliance training, and to know where they stand in terms of possible public allegations (especially in tech start-ups that link customers to services).